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Tuesday, May 19, 2020

ANALYSIS/OPINION:

Pandemics are hardly new — the Spanish Flu and similar pathogens in 1957, 1968 and 2009 ripped through America with great ferocity. What makes COVID-19 different for our political future is that we have chosen to almost completely shut down the economy to minimize causalities.

President Trump has been vilified for initially dismissing the threat as the virus spread from China, but he had help. Well after China was taking aggressive action in Wuhan, House Speaker Nancy Pelosi was shaking hands, encouraging visits to San Francisco’s Chinatown and criticizing Mr. Trump’s travel ban on China.


On March 2, New York Gov. Cuomo stated “We don’t even think it’s going to be as bad as it was in other countries.” Shortly thereafter, the seat of global capitalism became the epicenter of the pandemic.

This is not to let Mr. Trump off the hook, but it illustrates that partisanship and the upcoming election blur the vision of responsible leaders in both political parties. That makes the loss of life and economic fallout much worse.

When it’s all over, China likely will have emerged quicker and with its economy more intact — that will impress the minds of young voters.

Even before the COVID-19, socialism was attracting the sympathies of millennials, and now they have been riveted by two great traumas — the financial crisis and the coronavirus shutdown — that profoundly impair their financial stability, ability to purchase homes and raise families.

Living with the burdens of elders’ broken promises — stints at college that bequeathed burdensome debt, too few decent career opportunities and an Affordable Care Act that further monopolizes health care without making it affordable — the current crisis will make them even more skeptical about politics in Washington. And prey for pied pipers of socialism like Sen. Bernie Sanders or Trojan Horses like the Green New Deal.

Capitalism is a Darwinian system. Recessions cull firms with weak business models and in declining markets. In good times, firms like JC Penney and Neiman Marcus borrow cheaply and when the evitable next downturn follows, debt burdens drive them to Chapter 11, downsizing and even closure.

With unemployment heading to 20 percent and the economy vulnerable to a permanent malaise, the Federal Reserve has embraced radical interventions that may ensure some kind of recovery but will also slow future growth and exacerbate inequality.

The Fed is going around the banks and other financial institution it regulates to directly purchase corporate, state and municipal bonds, and it is opening direct lending windows to corporations and small businesses.

Should the Fed, as some suggest, start purchasing stocks in publicly traded companies, Chairman Jerome Powell will have a state bank unrivaled in its reach by any socialist or communist enterprise in the world.

The Fed being a remote institution is in a much better position to assess the prospects for repayment by large businesses — with established credit ratings, analysts that follow their prospects and markets that grade their likelihood of default — than for small businesses.

The Fed’s lending programs cannot help but rescue more precarious large corporations than equally challenged mom-and-pop operations — as least as measured by total capital deployed and sales.

The added concentration of economic power that follows will further elevate labor markets and wages of those with the skills to prosper from the growth of big enterprises from those stuck in service activities like restaurants and the gig economy.

Stock and bond markets and private investors recognize that crises change consumer behavior and offer less support in recessions to industries with falling prospects.

Crowded dining rooms, daily briefings and group visits to attractions on shore may make cruise ships petri dishes for COVID-19 but also for flus, colds and other communicable diseases. Cruising will become more expensive as operators seek to better space people and attract fewer customers, but the Fed threw Carnival and other operators a lifeline through intervention in corporate bond markets.

That retards the redeployment of capital to better uses and will repeat in other industries. The economy will not attain its former size quickly. GDP growth will hunker down to about 2 percent or less and average wages will remain anemic.

All of that will further impair the dreams of young Americans and as the demographic footprint of baby boomers recedes, Mr. Sanders’ successors will find a more receptive audience for democratic socialism.

Moderates in both political parties better find a way to better get along and start coming up with answers.

• Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.


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